Capital Market and Information Efficiency: Analysis of ASX

This report delves into the concepts of capital market efficiency and information efficiency, specifically examining their application within the Australian share market (ASX). It explores the influence of future profits on share indices, highlighting how expected earnings growth impacts stock prices and investor confidence. Furthermore, the report analyzes the repercussions of the US-China trade war on the ASX, detailing the market's decline and the economic and political factors at play. It evaluates the information efficiency of the Australian market, demonstrating its responsiveness to global events and its ability to reflect relevant information in stock prices. The report concludes by emphasizing the interconnectedness of financial markets, the importance of accurate information, and the implications of external factors on market performance. The analysis is supported by references to academic sources and real-world market data, providing a comprehensive understanding of the subject matter.

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Capital Market and Information Efficiency

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Table of Contents
Introduction......................................................................................................................................3
a) Impact of future profits in share index........................................................................................3
b) Changes in Australian share market due to US-China trade war................................................4
c) Information efficiency of Australian share market......................................................................5
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
The report is presented below in relation to the capital markets and information efficiency
and in that all the aspects relating to the same will be discussed. The manner in which share
index is affected by the expected profits of the companies will be considered and the importance
of the future profit for the value will be taken into account. There will be consideration of all the
aspects which needs to be taken into consideration for the same. The reason for the impact of the
US-China trade war on the Australian share market will be discussed and in that the political and
economic events will be involved for the ascertainment of the main cause. It will be identified
whether the market is affected by the events which are taking place in the global markets. The
information efficiency of the Australian share market will be evaluated and an argument in this
respect will be presented.
a) Impact of future profits in share index
In the financial markets there is a continuous analysis which is performed and in that
various forecasts are made. There is the determination of the growth which will be made in terms
of the profits in the coming period. The value of the stock is determined on the basis of the
revenues and profits which are expected (Bateman et al., 2012). If there will be future profits
which are expected then it will be increasing the multiples in the current market. With this the
stock prices will be rising and as the stockholders will be expecting a higher return. The main
aim behind forecasting the returns is to determine the value of the stock and due to this it is an
important factor in the process of valuation (Wemyss, 2019). The earnings growth which is being
made will be compared with the growth in the revenue so that the cost efficiency of the company
can be evaluated.
It has been identified that the businesses which are expecting the higher profits will be
reflecting the rise in the stock prices. The determination of the expected profits will be used by
the investors in analyzing the company which will be successful and will be generating more
returns (Bachoo et al., 2013). By the help of this more investors are interested in the stock which
is having higher returns and by that the share value will be increased leading to boost in the

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market index. The customers will be confident about the position and success of the company
and will provide a positive response leading to the positive movement in the share prices.
The main motive of all the investors is to earn higher dividends and that will only be
possible with the rising returns. In the cases with increasing earnings, there is a positive image
and confidence which is developed (Sharif et al., 2015). The number of investors will be
attracted and with the rise in the demand the market will be affected in positive manner for the
provided index. It is the fundamental factor that with the increase in the earnings there is an
increase in eth stock process which will be making the stock index to respond positively.
b) Changes in the Australian share market due to US-China trade war
The Australian share market has been affected in an adverse manner by the escalating
trade war that took place between the US and China. By this the benchmark ASX200 index has
dropped by more than 2.9%. Within the two days the shares in Australia have lost around $90
billion and Wall Street was suffering the worst period of the entire year. It has been identified
that this was due to the retaliation of China against the US tariffs in which the Yuan has been
devalued and made at the lowest level (IG, 2019). The currency in China has dropped and by this
it has made all the exports in the country to be cheaper and the adverse impact of the US tariffs
has been offset in partial manner. The situation was worsening and in that there were chances of
recession which were arising. To eliminate that it has been identified that in case of the
continued war between China and US there will be need for the Morrison government to bring
some cash in the Australian economy. The US is the strategic ally and China is trading partner of
Australia and by the trade war among them Australia got stuck between them. Due to this the
impact was faced by the Australian market and there was downfall in the stock prices.
There were various economic and social events which took place in this period and they
highly affect the stock prices. If the economy of any place is in danger then the stock prices will
be facing the downfall. The share market of any nation is affected by all the events which are
taking place in the global market as there is some link which is present among them. There are
various political decisions which are taken and that create the situation of uncertainty. In such
circumstances, it becomes difficult for the market to operate in stable manner and the impact is
seen in the stock prices (Chau, 2019). There are fluctuations which take place in the stock market

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and it depends on the events that whether the impact will be of positive or negative nature. The
uncertainty in the economy leads to the situation of uncertainty in the financial market also. The
purchasing power of the investors is affected by economic events which took place.
In some cases there is the situation of recession and in that the buying of the stock by the
investors is reduced and that affects the share price in a negative manner. As the demand is
declined there is the downfall in the value of the stock which is faced. This is the situation which
arose with the trade war in China and US. The impact of the same has been faced by the whole
economy including Australia (The guardian, 2019). Due to the war there were the conditions of
recession and in such case the Australian stock market experienced the highest downfall in the
financial market. This impact can be eliminated by making the war to end among the two
nations. The tariffs are imposed and that worsen the situation for all the countries which are
involved in trade with the countries. Australia was also affected due to this reason as it was
having the trade relations with China and so the impact of tariffs has been faced and decline in
stock market is experienced.
c) Information efficiency of the Australian share market
In all the financial markets it is required that the true picture shall be reflected and this
will be used by the investors and other parties which are involved in the market. The reflection of
the information in the market price of any stock is considered in the information efficiency and
by that, the true value of the assets included is determined. A market will be said to be
informational efficient if it will be incorporating all the information which is available in the
determination of the prices (Hooy & Lim, 2013). The current price of the stock is calculated by
taking into account all the information which is available in context of the business.
There will be a direct link which is established between the events and the price which is
determined. This makes the market to be efficient or not. In case of Australia there was
incorporation of all the facts and information. It has been noted in case of the US-china trade war
that the financial market in Australia is highly affected by all the circumstances. This shows that
the market is informationally efficient and reflects the true position to all the investors. It has
been noted in various other cases also such as in the case where the heavyweight mining sector
has lost one percent in the trading, there was the impact on the Australian market also and it

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opened at the lower rate (Smales, 2016). The benchmark ASX index has declined by 26.4 points
and also the decline was faced in the all ordinaries. Various countries were affected by the same
and their financial markets also involved the impact of the changes which took place.
In various circumstances, it has been noted that the financial market is informational
efficient and it is seen in case of election also. In all the years when the elections took place there
was change in the shares rate and this can be seen from the table provided below.
(Source: ASX, 2016)
The period around the elections experience the changes and the same is reflected in its
financial markets. The returns of the share market reflect the true position and in that, all of the
data which is relevant for the users and decision-makers is included in the best possible manner.
There are various policies which are established and it is required that they shall be
included in the decision making and the impact which will be made on the financial market due

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to the same shall also be covered (The bull, 2019). It has been determined that in the Australian
financial market there is the incorporation of all the important facts which are relevant. Due to all
of these reasons it can be said that the Australian financial markets are very efficient in terms of
information and represent the true position to all. This is a good factor as the investors will
develop faith in the data which is released and will be able to take the decision by using all the
available information.
Conclusion
The report has elucidated all the important aspects which need to be covered in relation to
the financial market and stock prices. The relation which exists among the share price and the
expected profits has been considered. It has been determined that there is a strong relationship
that is preset and the share index will be highly affected with the change in the profit level for the
coming period. The value of the stock is determined by considering the position of earning of the
company in the coming period. The complete scenario behind the China-US trade war has been
considered and explained in the most effective manner. There is the impact which is faced by the
Australian market due to the same and it has been covered in the discussion. The reason and the
manner in which impact is made have been identified and provided for a better understanding of
all the aspects. The manner in which political and economic aspects affect the financial markets
has also been taken into account. The global events and their impact on the financial market have
been considered and explained in appropriate manner. The informational efficiency of the
financial market in Australia has been considered and it has been determined that the market is
efficient in all aspects. The response of the market is highly dependent on all the information
which is present and then the decisions are made in best manner.

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References
ASX. (2016). How Federal elections impact the sharemarket. Retrieved from:
https://www.asx.com.au/education/investor-update-newsletter/201606-how-federal-
elections-impact-the-sharemarket.htm
Bachoo, K., Tan, R., & Wilson, M. (2013). Firm value and the quality of sustainability reporting
in Australia. Australian Accounting Review, 23(1), 67-87.
Bateman, H., Eckert, C., Geweke, J., Louviere, J., Thorp, S., & Satchell, S. (2012). Financial
competence and expectations formation: Evidence from Australia. Economic
Record, 88(280), 39-63.
Chau, D. (2019). Australian stock market slumps afterUS-China trade war promptsWall Street
plunge. Retrieved from: https://www.abc.net.au/news/2019-08-06/australian-share-
market-tumbles/11386872
Hooy, C. W., & Lim, K. P. (2013). Is market integration associated with informational efficiency
of stock markets?. Journal of Policy Modeling, 35(1), 29-44.
IG. (2019). What causes share prices to change?. Retrieved from:
https://www.ig.com/au/trading-strategies/what-causes-share-prices-to-change--190128
Sharif, T., Purohit, H., & Pillai, R. (2015). Analysis of factors affecting share prices: The case of
Bahrain stock exchange. International Journal of Economics and Finance, 7(3), 207-216.
Smales, L.A. (2016). The role of political uncertainty in Australian financial
markets. Accounting & Finance, 56(2), 545-575.
The bull. (2019). ASX opens lower as big miners slump. Retrieved from:
https://thebull.com.au/asx-opens-lower-as-big-miners-slump/
The guardian. (2019). Australian stock market down 2.4% as US-China trade war hits home.
Retrieved from: https://www.theguardian.com/australia-news/2019/aug/06/us-china-
trade-war-hits-australian-stock-market

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Wemyss, S. (2019). WHAT INVESTMENT RETURNS CAN WE EXPECT FROM SHARE
MARKETS?. Retrieved from: https://www.prosolution.com.au/share-market-
expectations/